Hello Monkeys,
I am relatively new to real estate and was hoping you could shed some light on the below questions I had. Thank you in advance!
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Are the acquisitions/investments made by value-added/opportunistic funds development focused? If so do investment associates get hands on development experience working for these funds? I.e actually working with zoning, permits, construction, tenants, etc.
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How does experience differ at smaller shops relative to bigger ones? Is it better to work at a smaller shop if someone wants to start their own one day since you most likely get more experience managing an entire deal process/property or does the brand name of a bigger shop outweight this by allowing you to raise more capital in the future?
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How many value-add/opportunistic PERE shops are there relative to PERE shops in general? Particularly those that offer development experience?
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What property types do these funds target? CRE? Multi-family? Hotels?
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How coveted are these positions? How hard would it be for someone with non-real estate IB background to get these in particular (specifically I am coming from FIG IB)
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Do distressed real estate investments fall under opportunistic? If so, do opportunistic PERE firms do both distressed + development?
Thank you - sorry I know it's a lot of questions but any knowledge you can share would be very valuable
1) Terms like value add and opportunistic have different meanings to different people however in my experience value add generally involves adding value through significant lease up and or renovations. Opportunistic Is further along the risk spectrum and can involve a complete repositioning of an asset and depending on your definition ground up development as well.
2) Difficult to answer this one as there is no cut and dry answer however yes in my opinion a brand name firm will help you gain some legitimacy.
3) You are getting into tricky territory because some feel by definition REPE only encompasses opportunistic funds however others feel this includes value add and core funds.
4) All property types.
Well, I tried to make response, but WSO won't let me...
Of course this goes through finally. Let me try it.
Meh, depends what you consider "development." My shop is all value add, and while we deal with construction and permits (or more specifically, the project management people do), I wouldn’t call us developers. To me, a developer is someone who buys land and builds a building. We buy buildings and make them better buildings.
The difference is the same with any business really. At a big shop, you’ll have a more structured environment, a more defined job role, etc. etc. I wouldn’t say starting small or starting big is more important for your eventual career progression, I would say WHO you work for is the most important. So in your market, if a smaller company has a principal who is local royalty, more or less, that can carry just as much weight, if not more than, a big time corporate name.
I know a guy who managed the entire deal process for a company for years and almost single-handedly took them from $50 million in assets to over $700 million. He didn’t raise capital though – he just put it to use. When he got out on his own, it was very hard for him to raise money at first, even with a ridiculous track record, because he didn’t have the connections – his old principals did. You need to know people. Luckily, in real estate, everyone important’s son or daughter is probably working for them and those sons and daughters are probably your age. Network.
No idea. Sorry. Probably varies highly between markets and asset classes.
Hotels are kind of their own thing. I’d say most target commercial and multi-family, but hell, you can find a fund or a company for anything if you look hard enough.
I don’t know about “coveted” or anything. In my experience, it’s really not hard to break into real estate. I am in a summer internship at a very nice REPE shop with some ridiculously successful and connected people in a smaller market. I’m a Poli Sci/Econ major with a shit GPA from a no-name school with meh finance knowledge and excel ability, but I had two years of real estate experience before this so they know I’m “interested” in the profession. There is absolutely zero chance I would have gotten a job at a traditional private equity firm, for comparison. But in real estate? Anything is possible.
Not entirely sure what you mean by “opportunistic” to be honest. Aren’t all businesses opportunistic? Something I’ve learned from working here is that some of the terms and classifications taught in business school rarely are embraced by the actual professionals. Hell, a broker called my boss yesterday and asked him if he was a “5 cap buyer.” He said, “Listen, my only business philosophy is making money.” Also, while we’re primarily a multi-family value add shop, we also just happen to own some retail, and we just happen to be building houses right now too because the housing market here is absurd.
Above response far better articulated. I didn't have time to finish my response haha please ignore.
Down time: the joy of being a summer associate
Thank you all for your responses! They were all very helpful. I guess I might be a bit confused on the terminology so do you think you can help me figure out what falls under which category?
Value-Add: does this only involve renovations and conversions? Say you change a commercial six story building in Manhattan to a residential one - is that value-add?
Opportunistic: is this primarily only ground up development? I assumed this just meant very risky so I thought distressed would fall here as well. Do REPE firms usually do distressed exclusively or is that just another form of acquisition to them that almost all of them practice?
In addition to the comments above, you could also define the risk spectrum by IRR.
Value-Add: 13% - 18% LIRR. Typically a renovation or lease-up with 50-65% leverage of total cost. One could also seek Value-Add returns by purchasing a core/core-plus asset (e.g., CBD office) and leveraging up with mezz to 80-90%.
Opportunistic: 20% and up. Due to time-value of money, these are typically short holds. As BX says, "buy it, fix it, sell it". While developers and REPE are both chasing IRR's north of 20%, one builds from the ground-up (obviously) while the other typically buys existing assets* in a unique situation. You definitely have to take on some risk... or know something other people don't. Leverage here is usually 70+%
*By assets it could be a physical building (real estate private equity) or an operating company (private equity covering the real estate sector). This has been discussed a few different times on different threads and I don't think we're any closer to a consensus.
Eh I wouldn't go by these measures. Its a "feel" play in whatever market your located. For example, in my market if someone was getting anywhere near 18% LIRR return, I guarantee it would be a HUGE re-positioning play and would most likely qualify at Opportunistic. I'd probably say the same thing for 15%+---but that's here and you're there.
Same goes for this. Also, why would you say leverage would be 70%+. Unless you're talking about a construction loan for a ground up development (IO), I'd have to disagree. Banks around here, if you're converting an old warehouse into an apartment building, would actually make you put up more equity than you would in a true-value add opportunity-- one where you're renovating the lobby or need to lease up 70% of the building.
"One could also seek Value-Add returns by purchasing a core/core-plus asset (e.g., CBD office) and leveraging up with mezz to 80-90%."
Have you been involved in one of these? How did you get that type of positive leverage with mezz debt on a core asset? Would think you'd be seeing negative lev with the high mezz rates and the low cap rate core asset.
Also - what exactly is a lease up?
A lease-up is when a property has been recently developed, and beings to lease to tenants. For example, a multi-family asset ends it's lease up stage once it reaches around 85-90% occupancy.
A lease-up value-add play is when you buy an existing building (usually multifamily, office or retail) that is below stabilized occupancy (which varies by asset type, quality and the market it's located in) with the ultimate goal of leasing it up to this stabilized occupancy and then reselling it. The project could also include capital improvements to make the property more attractive/marketable and therefore easier to lease, but this is not always necessary.
Here's a simple example:
A fund buys an existing office building that is 50% occupied (presumably at a sizeable discount). Stabilized occupancy for offices is 90% in this hypothetical market. It then leases up the building to 90% or above, at which point it would be considered "stabilized." The fund would then resell the building at higher price since it now has a higher valuation with these newly locked in cash flows (coming from the new leases).
There are also cases where a building might have a stabilized occupancy, but it's tenants are paying far below market rents. For instance, tenants in an existing building might be paying $5/sf in rent when the market rate is $10/sf. A fund might buy the building and will either buy out the current tenants (or wait until their leases expire if that's in the near term) and then re-lease the space at the higher $10/sf market rent, therefore increasing the amount of money the same building brings in. Once the building is re-leased or "marked to market", the fund would resell it at a higher valuation.
@indentured
IndenturedAgreement This definition is taken from Wikipedia..it seems to be fairly valid. Value Added: This is a medium-to-high-risk/medium-to-high-return strategy. It involves buying a property, improving it in some way, and selling it at an opportune time for gain. Properties are considered value added when they exhibit management or operational problems, require physical improvement, and/or suffer from capital constraints.
Opportunistic: This is a high-risk/high-return strategy. The properties will require a high degree of enhancement. This strategy may also involve investments in development, raw land, mortgage notes, and niche property sectors. Investments are tactical.
Thank you for the insightful answers! Would it be possible for anyone to also shed some light on conversions? That's what I am particularly interested in. Like buying a poorly performing/leased property or a property that is beat down and then either redeveloping it or converting it from commercial to apartment or apartment to hotel, etc. what does this traditionally fall under? Value-add or opportunistic? Also do PERE firms do this a lot or would it be difficult to find some like this? I know I have seen online many realty firms like Thor Equities do it but not sure about PERE
Trying to get into REPE long-term with the goal of eventually starting a value-add shop. Would appreciate forum insight on the path to get there....specifically, for the individual coming from 4 years construction mgmt/architecture (w/ solid understanding of sticks and bricks side of RE) and going into a T15-20 MBA for RE finance/private equity studies, what progression could lead to REPE (if even possible)? Would there be 1) an ideal summer internship to pursue and 2) what type of position upon graduation and where at (REIT/REIB/Boutique firm)? I am interested in whether bringing this type of experience (combined with an MBA finance education) to a firm that invests in real estate could open doors.
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